Microsoft announced Friday that it will discontinue its $400 rebate to new subscribers of MSN Internet service, a deal that drove PC buying but also created a financial crimp for the company.

The Redmond, Wash.-based software giant, which is battling America Online for subscribers, will instead offer one free year of MSN to buyers of new personal computers.

Microsoft is not specifying which new computers will come with the one-year free service. Instead, the company is letting retailers pick which computers it will attach to the offer. One retailer may include the offer with all PCs in the store, while another may only include PCs from Compaq Computer or IBM.

So far, only RadioShack and Best Buy have agreed to participate in the program, but Microsoft representatives said other outlets are likely to sign on soon.

The $400 rebate deal began in November 1999. With some exceptions, it applied to people who purchased PCs and committed to three years of MSN service. The deal will end in the first week of March. The one-year free service will begin in the spring, possibly as soon as the current offer expires.

The idea for one year of free service is not entirely new. In November, Microsoft and Dell Computer said they would offer buyers of Dell consumer PCs one free year of Internet access through MSN.

MSN, which has more than 4 million subscribers in all, added 500,000 in the fourth quarter of 2000. By comparison, AOL has nearly 27 million subscribers.

Despite a massive slowdown in PC sales, Microsoft expects the new offer to attract at least 500,000 new subscribers in each of the next several quarters, said Bob Visse, lead product manager for MSN marketing.

"I don't see any end to it, and I think we'll actually be able to accelerate it," Visse said of the goal. "The service and the products are being so well received that we think we can continue growing the business based on those things."

Foreshadowing
Analysts had been anticipating some change in the rebate structure for MSN because Microsoft executives complained in a Jan. 18 earnings conference call that the $400 offer was eating into the company's bottom line.

MSN service costs $21.95 per month, so the one year of free service is worth $263.40 to subscribers. Visse would not say whether the new offer and its associated ad and marketing campaign will cost the company more or less than the $400 rebates, but he said the company's guidance for earnings and revenue won't change because of the new promotion.

"As far as the bottom line for Microsoft, this will not have any change to the guidance announced in the Jan. 18 earnings call...There was already an adjustment made at that time," Visse said. "Overall, I can't give you real clarity as to 'Will this cost less or more to the business?' in that it's not an apples-to-apples comparison."

Although Microsoft doesn't want to compare the two promotions, analysts are eager to do just that. IDC analyst Roger Kay speculated that the new program will be more economical for Microsoft, but he wondered whether the company was shifting programs exclusively to cut costs.

"Does that mean they have enough (subscribers) or does it mean they can't afford it?" Kay said. "I've got to believe it's more the latter than the former. You can't give away the store forever."

The advent of the $400 rebates in late 1999 led to a boom in midyear PC sales in 2000. However, Kay said, the rebates have probably run their course as far as convincing people who don't own a PC to buy one.

"I would say the (PC industry) has ridden it about as far as they can," Kay said.

Retailers: A reason to grumble
The new promotion is likely to elicit grumbles from retailers, who relied heavily on $400 MSN rebates to sell PCs during the first part of 2000. Microsoft also extended the rebate to other non-PC products. Retailing giant Best Buy, for example, sold 200,000 MSN subscriptions and gave $400 instant rebates on anything in the store.

Compared with a $400 discount, consumers may have a more difficult time determining the value of the new program or may not consider it at all when trying to decide whether to buy a computer, said Matt Sargent, industry analyst for ARS.

"To be honest, customers don't put a whole lot of value in it. They just see it as a free trial," Sargent said. "It's a smart move for Microsoft, but I don't think it's going to help retailers at all. If it's just a free year of service, where's the carrot here?"

Microsoft would not say whether it was giving a cut to participating retailers or divulge any information about how the new promotion will affect retailers.

The company also announced Friday that it will kick off other promotions in the spring. The company will offer a $200 rebate for two years of MSN Internet access, as well as a $75 rebate on a nine-month subscription.

Both of those promotions are independent of the new one-year offer, and Microsoft will not require customers who want to sign up for the two-year or nine-month subscriptions to purchase a new PC.